In a recent interpretation, the CRA confirmed that interest expenses incurred by an individual may be deductible even where the income earned (or expected to be earned) on the underlying investment does not exceed the interest paid.

The Income Tax Act specifies that in order for interest on borrowed money to be deductible, the borrowed money must be used for the purpose of earning income. In confirming that income is not limited to net income or profit, this CRA interpretation follows the Supreme Court’s comments in Ludco Enterprises et al v The Queen (2001 SCC 62), which were also quoted in paragraph 10 of IT-533, Interest deductibility and related issues.

Notwithstanding this consistency with case law and established interpretation, the CRA makes a point of warning of the potential impact of draft legislation on the future determination of interest deductibility.

In October 2003, the Department of Finance proposed draft amendments, which remain under review, that would restrict the full deduction of interest expenses in situations where the interest expenses incurred are expected to exceed the income generated over the life of the investment (i.e., where the underlying investment is not expected to generate net income).

The CRA interpretation concludes with a reminder that these proposals still exist, and that until the review of these legislative proposals is complete and the results are made public, it is unable to further comment on their potential impact on interest deductibility.

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